Boeing flies high in face of division in Europe


THE takeover of McDonnell Douglas by Boeing should be seen as an opportunity rather than a threat by its rivals, a senior European airline executive said yesterday.

The two US companies would be spending so much of the next year putting their organisations together and dealing with competition regulators that they would have little time to sell aircraft, he added.

But although there are enormous obstacles to the merger of the two companies, the observation was not entirely serious. The takeover of McDonnell Douglas, the top manufacturer of fighter aircraft, by Boeing, the world's biggest maker of civil aircraft, is widely seen as the precursor of huge changes in the world's aerospace and defence industries.

The merged company, which is to carry the Boeing name and be dominated by its executives, will be an overwhelmingly large presence in the civil aircraft market, with more than 60 per cent of global sales. It will challenge Lockheed Martin for dominance of the US defence market. And if successful, it will make Europe's faltering attempts to consolidate its defence industry look feeble.

While the timing of the announcement was a surprise, the two companies have been talking for years. Aerospace industry executives believed McDonnell Douglas would have to find a partner and that its disappearance from civil aircraft manufacturing was merely a matter of time.

Boeing has long been dominant in the civil industry, with 346 orders last year. While McDonnell Douglas managed to edge Airbus into third place, winning 110 sales to the European consortium's 106, this was widely seen as an interruption in its long term decline.

Its main problem is the small range of aircraft it offers for sale. Aircraft manufacturers believe it will be essential in future to offer airlines an entire family of aircraft, ranging from 100 seats to 550. Buying aircraft with common electronic and operating systems from one manufacturer enables airlines to make savings on training, maintenance and the purchase of spare parts.

Aircraft manufacturers are particularly keen to compete in the market for expensive aircraft of 400 seats and more, where Boeing has a monopoly with its 747.

Boeing is trying to increase its dominance of the large aircraft sector with a 550 seat "stretched" version of the 747. Airbus plans 375 seat and 550 seat aircraft to add to the 335 seat A330.

McDonnell Douglas, however, has failed in its attempt to extend its range beyond its 300 seat MD-11 The company earlier this year abandoned plans to build a 400 seat version of the MD-11.

One immediate advantage of the merger is that Boeing will be able to make use of McDonnell Douglas engineers. With demand from carriers rising, Boeing is increasing its output of Boeing 7375 from 10 a month in January to 17 a year later. There will also be increases in production of the 747 and the twin engined 400 seat 777. The company is desperately shirt of skilled, staff and has been advertising for engineers and designers in Europe. McDonnell Douglas engineers and designers will be moved to Seattle to work in the merged company.

While the merger eliminates one of the world's three manufacturers of large aircraft, it will not substantially increase the competitive pressure on Airbus. This is because most recent contests to supply aircraft to airlines had become straight fights between Boeing and Airbus.

However, aviation analysts say they doubt the takeover will substantially reduce price cutting in the airline market. Competition between Boeing and Airbus will remain fierce, with airlines attempting to play them off against each other on both quality and price.

The implications of the merger for the global defence industry are more significant. The US now has two giant military aircraft makers Lockheed Martin and Boeing.

Within the US, these two companies will now dominate large scale equipment programmes for the Pentagon. Both now have a turnover more than twice that of their largest European competitors. The European military aircraft industry, by contrast, remains fragmented and almost aimless.

Informal talks between most of the defence companies recognise the need for change, but melt away before hard decisions are taken.

The hiatus gives the US giants an opportunity to pull even further ahead of Europe.

Within Europe, the US is already making headway. Outside the EU and the US, European fighter manufacturers are being squeezed.

The result may be that Europe's defence industry is forced into ever smaller and less attractive niches, selling aircraft or technologies to countries which the US does not care to back. And as the export base shrinks, the cost of producing smaller numbers for the domestic market rises. The four nation Eurofighter and French Rafale could then be the last generation of fighters designed in Europe.

The complicated process of merging organisations as large as Boeing and McDonnell Douglas might give Europe's aerospace and defence companies a breathing space. By this time next year, however, they will probably be up against a more formidable competitor than they have ever faced before.